21 April 2011

Republican budget guru Paul Ryan has a plan to end Medicare as we know it to be replaced with a series of less-generous vouchers. The House of Representatives has voted to implement this plan. The political side of this has been written about a lot, and I am not going to rehash what has been better covered elsewhere. I do want to address what seems to be a persistent fallacy or delusion which is held to a near-religious level by many free-market conservatives: The idea that market economics can have an impact on health care costs.

This concept has underpinned every major Republican health care plan since, well, since Mitt Romney's proto-ObamaCare reforms. The idea is that consumers, when they have "skin in the game," and when they are empowered and incentivized to see that their money is spent efficiently and only as necessary, will change their health care consumption behavior in a way which will force providers to compete on cost and quality and thus drive down costs. This is wrong, mistaken, misguided and inaccurate.

It's undeniably true that markets do work in this way, most of the time. The auto industry and the fall of Detroit is a perfect example of the invisible hand at work. It will not work in health care. Health care is a fundamentally different market for three major reasons:

1. Health care is generally not a refusable or elective service.

By this, I mean that in most cases, the health care costs are driven by medically necessary procedures. You get pneumonia. Your knees wear out. You find a lump in your breast. You notice blood in your stool. Barring the denial/self-neglect approach that some people take, when you develop a medical problem, you need to spend money to remedy it. While the timing of your knee replacement may be elective, whether to do it or not generally is not, if the alternative is being disabled and non-ambulatory. It is an inelastic demand, like the demand for gas. When gas gets more expensive, you still have to fuel your car, and except for very small variations, the demand for gas does not vary with the price. Similarly, the demand for medically needed care is not going to be terribly price responsive. When your doctor tells you that you need chemotherapy, you don't make the decision to proceed based on the cost, but on the need. And the number of recreational colonoscopies performed is actually very low.

It is true that some medical costs are elective and price sensitive -- preventative care, luxury procedures like Lasik, some office visits. These, however are a tiny fraction of overall health care costs. As in my analogy, some people do drive less when the price of gas goes up -- they take the bus instead -- but this does not reduce demand enough to make a difference in the price of oil.

2. There is an asymmetry of information

This asymmetry relates to both price and necessity. When your orthopedist tells you that your knee pain is due to a degenerated meniscus and that the best treatment for that is athroscopy, most consumers are going to simply accept the surgeon's advice. Now, as it happens, there is good evidence that arthroscopy of the knee provides no more benefit than placebo, but 99% of patients are not going to be aware of this and are not going to bother to do the research to find it out. Those that do, might find that the surgeon has an explanation why, in your case, he thinks it will be helpful despite the studies showing otherwise for other people. In most cases, the patient must trust the physician to provide accurate information on what is really needed. And if you should ask your surgeon what the cost of the arthroscopy will be, the answer will probably be "I don't know." Price transparency is poor to begin with but there is the very real fact that based on a patient's individual payer status the cost will vary dramatically, and the surgeon probably does not know what the cost will be for your case. Finally, when consumers make health care providers compete against one another to decide by whom and where the care will be given, they tend to be concerned primarily with quality and with cost as, at best, a secondary concern.

All these factors greatly inhibit competition and the development of a free market. To some degree it is possible to mitigate these, through, say, all-payer price setting, and mandatory disclosures and publishing outcomes data, etc. However, the third variable, in my opinion, makes the rest all-but-moot.

3. Purchasing power is concentrated in the hands of a very small number of "consumers"

This is the wooden stake through the heart of the idea that consumer behavior can effect cost containment. The functioning of a free market is dependent on the ability of consumers to vary their behavior to force suppliers to compete. However, you and I can be as scrupulous and cost conscious as we like. We are not sick. (Well, I'm not anyway. I hope you're OK.) The driver of cost is the small fraction of people who have serious medical conditions. It's the old 80/20 rule writ large.

Though the data is a few years old, I doubt the distribution has changed. To emphasize, HALF of all health care costs in the US is concentrated in only 5% of the population, and 80% of costs are accounted for by the top quintile! (source: Kaiser Foundation PDF)

So the effect here is that with such a concentration of costs in such a small segment of the population, the ability of the larger population to move the market is highly restricted. You can make 80% of consumers highly price sensitive, but they can only affect a tiny fraction of healthcare spending. And for the generally well, their costs are probably those which are least responsible for the spiraling inflation. They're not getting $30,000 stents or prolonged ICU stays, or needing complex chronic disease management.

Conversely, those who are high consumers of health care simply cannot be made more price sensitive, since their costs are probably well beyond what they could pay in any event, and for most are well beyond the limits of even a catastrophic health insurance policy. Once you are told that you need a bypass/chemo/stent/dialysis/NICU etc, etc, etc, the costs are so overwhelming that a consumer cannot possibly pay them out of pocket. Since, by definition, these catastrophic costs are paid by some form of insurance, the consumer cannot have much financial interest in cost containment. For most, when they are confronted with a major or life-threatening illness, their entire focus shifts to survival, and they could care less about the cost. Further, many who are in this sick/expensive category have some diminished capacity with regard to their information gathering and decision-making. I'm thinking particularly of the elderly and those who have had strokes or any one of a multitude of illnesses which impact cognitive function or other functional capacity. These patients struggle with their activities of daily living -- getting dressed, bathing, transportation, housing, taking their meds. Their ability (let alone interest) in price-shopping their doctors is minimal to nonexistent, even if they had an economic incentive to do so. Taking someone who has a serious illness and making them have more "skin in the game" would represent a cruel additional hardship, but would be ineffective in creating an economic environment in which consumer behavior brought down spiraling health care costs.

On a personal note, I've recently acquired some experience with the perspective of someone who is a member of the 1% club. As I have blogged, my wife is under treatment for stage IIb breast cancer. We are pretty highly functional and informed consumers, and we actually have the financial resources to pay for more of our care than most would, so if, hypothetically, we had a stronger incentive to seek out more cost effective care we would be in a position to do so.

So, in our case, would we? No, of course not. My wife's chemo is going to cost >$100,000. I am sure that we could cut down the cost. Herceptin is pretty expensive -- are there less expensive alternatives? Turns out there are not. We spent a lot of money on Neulasta to keep her immune system operational during the intense chemo. Maybe we could have gone without it and just risked neutropenia? Maybe saved some money and used neupogen instead? That would have been quite a risk at minimal savings. Maybe we could have skipped the expensive anti-nausea meds? Not a chance! Chemo is miserable enough that those meds were worth every penny. (not to mention that all these meds might actually be cost-saving in keeping her out of the hospital with complications of chemo.)

What other options do we have in deciding how we treat the cancer? Radiation is non-negotiable, but maybe we could shop between facilities for the best deal. Of course there may not be much price flexibility on radiotherapy given the huge capital costs required. We will be interviewing half a dozen surgeons to determine who will do the mastectomy and reconstruction, and we are 100% focused on quality in making that choice.

So, in the end, if we had the proverbial "skin in the game" in making treatment decisions for my wife's cancer, I doubt it would make one iota of difference in the actual cost, or at very best only a small marginal difference in a very very expensive course of treatment. Bear in mind, we are the perfect test case! I can afford to pay $20,000 or more out of pocket if I need to, and it STILL wouldn't make a difference. If families with more limited means were obligated to pay the same $10-20K, if would mean financial ruin, or inability to access the lifesaving care, but it wouldn't allow the invisible hand to guide the market towards cheaper, more efficient care.

This is, ultimately, why people who believe that passing along the cost of health care to consumers will promote cost savings are wrong, and health reforms which are predicated on this concept will not work.

65 comments:

Fantastic post. I might add one minor point, that the costs most amenable to being reduced by the invisible hand (the luxury and elective procedures) are already most likely to be the ones that we pay mostly out of pocket, because insurance companies aren't willing to cover them.

Great point...and I'd add one more: We as a nation are not willing to let folks who game the market and lose face the ultimate consequences of their health care actions and decisions. For example, if someone choses to carry no insurance because they believe they're invincible, they will still get heroic treatment if they show up at an emergency room- even though they have no ability to pay. What kind of market works like that?

I get the impression that this is one of those well-known Republican "archetypes" that they like to fling around in arguments: the neurotic person who spends willy nilly going into the ER every time they get a paper cut. It's not that it doesn't happen, but it's largely a bunch of crap.

On point two, the irony is that one of the better ways to find out whether or not your doctor is right would be to go . . . to another doctor, which costs more.

Very well laid out piece. I've bookmarked it to use in the future as a refutation when someone says "the market will take care of it."

I do, however, think that the 3rd point doesn't accurately reflect the mechanism through which people do (or much more common, do not) influence the market. While most of health care costs go to cover a small proportion of the population, payment is made by most of the population through insurance. Most of the 50% of the population that receives 3.1% of the health care spending participates by purchasing insurance.

Theoretically, this should lead to lower costs and an evaluation of the relative merits of different spending.

Of course, it does not. Points 1 and 2 of this post are example of reasons that the market is so distorted why insurance doesn't act as am efficient mediator between consumers and health care costs. I would add one more significant influence to the list: the inability of most people to act as consumers because of the distortion of receiving health care through their employer, with invisible subsidies, and an additional asymmetry of information. Reforming the market, as well as better education consumers, could help fix the disconnect between our spending and our priorities, and hopefully prevent health care from becoming a refusable service based on affordability.

I agree that the invisible hand will not drive costs or inefficiencies out of the system, else it would already be working toward that route. The invisible hand has, instead, guided the industry towards monopolistic tendencies due, at least in part, to the inelastic tendencies of demand in the health care industry. Indeed, the consistent example of an inelastic demand curve in my economics classes was insulin. If something sustains life at a fundamental level then demand will stay strong.

The scary part about proposing anything BESIDES the invisible hand to regulate any type of market is that it inevitably leads to more inefficiency and shortages (i.e. a physician shortage that we will surely see when the demand curve is significantly shifted towards the right by ObamaCare).

The only idea that I've been able to come up with myself to cure this problem is to increase competition -- like the breakup of MaBell, but to your points, inelastic demand curves will negate the positive effects of said monopoly-busting. We know that central planning (a.k.a. the great U.S.S.R.'s economic planning engine) failed miserably, leading to shortages across all areas of the economy. So what WILL work? ...

Your first premise, on a dollar basis, is flatly wrong. The third premise is mostly wrong. The second premise is correct.

If you examine the underlying data more closely, you would probably make the connection between his first and third premises. Being an ER doc, you're not directly observing where the big 50%-of-spending-from-5% of buyers is coming from: end of life care. Purchasing power *at any moment in time* is concentrated in that 5%, but everyone goes into the 5% at one end of their lives. And, harsh but true, much-to-most end of life care is perfectly refusable and entirely elective.

There is absolutely no reason that a 90-year old MUST have a new liver, or what have you. Perfectly understandable that they'd want one, and perfectly understandable for us to try to build a system where they can get one - but it isn't Johnny's broken arm or even his (successful) chemotherapy driving the health care costs, it's great-gran's endless series of hip surgeries before she shuffles off the old mortal coil.

Markets work. Doctors have been arguing for why medicine is the exception for a long while; it isn't persuasive.

Robert; either you missed the point or I have. I thought the point of using market forces on medical care was to reduce the cost of procedures so we all save money. Your examples are about reducing the total spent by refusing treatment, a very different animal.

I'm with Robert on this one, Liam. Dollars spent in an individual's last month of life are substantial, to understate in a big way.

I also agree that where we sit influences where we stand. I'm neither an ER doc nor an intensivist. Dollars spent on the category "primary care pediatrics" are spent needlessly, for the most part. (as an aside, shots can be given in schools and at public health stations, for a fraction of what I charge). So to me I see lots of room for cost-cutting. I wonder what geriatricians think about end-of-life care? Or are they the wrong guys to ask?

To Robert & Flea - I wonder how much the 80-20 graph would change if the data were restricted to exclude the last year costs. I doubt that it would change much at all. Also not everyone spends the last months of life in an ICU. My mother died at 90 and my father at 94. She died at home and he went to the ER feeling bad and died there a few hours later.

The outlier in medical spending lies in the general area of outpatient care, which includes imaging, doctor visits, clinic care, ambulatory surgery, etc. End of life care expenses are higher than they need to be, but not a prime driver.

One element that I think you've missed is that vouchers create transaction costs: figuring out how to spend them. Given the 80% of costs in the top quartile, that means most people who have little impact on costs will end up spending time and energy on figuring out the new system.

So even if it's a fiscal wash, it's a potentially large burden on the average person. What a win!

Robert, point taken on the massive spending in the last few months of life, but pick another example than 90 year olds getting a liver. They don't. I have first hand knowledge on how hard it is to get on a liver transplant list if you are not Steve Jobs. My 50 something wife was turned down because of other medical issues and a good friend's 81 year old father was turned down because of his age.

Given that the AMA artificially constrains the number of new Doctors and Specialists entering the market in a given year, I am betting if we broke their monopoly on accreditation we would see more Doctors even if compensation went down.

And on top of all that, it's not as though it's easily possible to find out what things cost ahead of time: http://www.washingtonpost.com/national/health/consumers-find-it-hard-to-determine-how-much-a-drug-regimen-would-cost-them/2011/03/02/AF2babMD_story.html

In the case of #3, publishing prices may not have any effect on customers... but it might have an effect on hospitals and insurance companies.

It could trigger some kind of "Wal-Mart-ification" of health care. Insurance companies need medical care for their clients, and hospitals are the suppliers. Imagine if they could say "Hospital XYZ can do an MRI for $1000, why should we pay you $2000?"

Of course, that only works if the insurance company gets some cover from the Feds. Otherwise hospitals and doctors will flip out about insurance companies putting lives at risk... like they did with the HMOs in the 1980s.

Thank you for a thorough and well-written piece. Really superb. I've been having this argument for years with people who want to eliminate any role for society and government. You can't treat health care like a regular purchase because you cannot reasonably expect people to ask 'how much' when their life and health is in the balance, or to be willing to pull the plug on granny for being 'too expensive' or 'not cost effective'.

Excellent post. I would question your assumption, however, that the 5% of people who account for ~50% of health costs are suffering from "major or life-threatening illnesses."

There are lots of excessive users (abusers?) of the health care system: the uninsured who don't have PCPs and show up in your ER for basic care; the alcoholics and drug addicts; the "worried well"; the patients with "gold-plated" insurance plans who demand the most expensive drugs; and so on.

Well, markets --and high costs-- work to encourage self-denial of care. High co-pays can eat up a lower income person's budget in an amazingly short amount of time if, say, physical therapy is necessary and prescribed.

It's necessary, but, for that person, there may be no way to pay for it. Even to achieve the person's continued health and functioning well.

So, no money available for the physicial therapy? And the person doesn't not get sufficient therapy?

What costs them arise for both the medical system and society?

But, someone wins if people self-deny. It's usually the bottom line of insurance companies.

So, yes, "markets work"...for the big insurance companies.

jawbone, following link from correntewire.com

Thank you for a persuasive (for all but rightwing conservatives) post.

When I began reading this sentence, I thought you were going to make a point about the Big Economic Meltdown, but I was wrong.

"Great point...and I'd add one more: We as a nation are not willing to let folks who game the market and lose face the ultimate consequences of their health care actions and decisions."

I thought it would read like this:

"We as a nation are not willing to let folks who game the market and lose face the ultimate consequences of their bad economic decisions and scams."

But, of course, through our elected officials, we make sure the Big Banksters cannot fail. We provide them with trillions in amazingly low interest loans through the backdoor of the Fed and we make them whole at the expense of taxpayers who have been impoverished by the banksters' bad decisions....

I hope you are a good ER Doc, because you are a terrible economist. You falsely assume that we have a free market system, we haven't for years. You leave out key information in your premise such as the artificially high cost of drugs because the US bears the brunt of R&D costs for the world, that what most people refer to as insurance is not insurance, the fact that if people really bore the brunt of the costs themselves that doctor visits would drop dramatically, don't address the cost of malpractice insurance, alternative medicines such as marijuanna or other homeopathic remedies, the fact that office staff could be drastically reduced if they did not have to employ four or five people per office to haggle with the payors all day, etc.

I personally don't care for Paul Ryan's plan at all, but at least he has a plan, what is your plan to reduce medical costs? Or, are you inferring that we need to just pay high medical costs? If that is the case then you are screwed, because by your premise the only way to keep down costs is to ration care like in Canada and Britain.

My observation has been that the politicians who advocate a market-based approach to healthcare have no skin in the game at all. I worked for Blue Cross for 17 years. Politicians have excellent health insurance to begin with and they have it for life. Insurance companies have special claims processing units to make sure that all claims involving legislators, former legislators and their families go through without delay and without denials. Politicians genuinely don't see what the problem is because for them, there is no problem.

Two things. 1) We should separate Medicare and all other health care. The end of life spending bulge applies mostly to Medicare, but health care costs for the rest of the population are growing too. Presumably there is not much end of life care in most corporate health care bills.

2) The explosion of costs has at least as much to do with using too many services as it does with the services costing too much to produce. If we cut doctors bills in half the total spending would still be exploding. We are using a lot.

1. You are omitting several market based interventions that could occur to confront this problem. Your argument assumes no possibility of improvements in the delivery of healthcare. Additionally, you are assuming the status quo in terms of who delivers health care, when a good deal of medical work could be carried out without a loss in quality by professionals with less training and who cost a good deal less. The licensing laws, however, prohibit it, allowing monopolies or greatly reduced competition. 2. This is a specious argument. I can say the same thing about plumbing and auto repairs. At the end, you point out some possible remedies, while others currently available were left out. And there certainly would be many additional remedies if there were market incentives for them to be created. 3. There are countless products (e.g., bass guitars, infant clothing) that only a small percentage of the population buys or uses, but that are affected by competition as much as anything else. Disregarding that, though, the real issue is the cost of healthcare. There are many ways market based ways to address costs, including removing tax exemptions for premiums, removing restrictions on insurance companies, allowing high deductible plans, changing licensing laws, etc.

I've arrived at the conclusion that Capitalism - while a wonderful system for production on most things - has serious issues when it comes to the human being.

Medicine, education, religion, family - none of these fit particularly well within a market model (which corresponds with your point on asymmetrical information - take a look at approval numbers for "all schools" vs. "your child's schools", for example). The overwhelming number of doctors/nurses, teachers, or priests/imams/rabbis I've met don't have professions as much as "life's work." I sure don't know any parents who procreated on the basis of the profit motive.

To Russ Nelson: That was a pretty low blow. He's offering his observations on the economically motivated behaviors that he perceives in his workplace and in patients/consumers. He might be wrong in a "macro" sense, or propose faulty solutions but his observations are valid and should be respected.

By the same token, even though you're an economist, your doctor probably asks you about your symptoms and your response to his/her treatments, and uses that information to make a more informed decision about your further treatment.

Dialogue is most productive when it can go both ways and all opinions are heard.

Interesting but your illustration that demand for gas is inelastic is not a strong argument. In fact, gas consumption changes significantly in response to price. People start driving less, buy more efficient cars, take public transportation (except in places where no public transit exists). Yes, they still have to drive, but there are many modifications a driver can make that do not affect their ability to keep living. Heck, they can even walk or bike everywhere (again with some constraints for those living in rural areas or those who cannot walk long distances). Medical care is much less elastic, especially as "consumers" really don't understand which services are vital and which are optional. It's not reasonable to ask someone to give up use of their arm because surgery is expensive.

I had a German chemist as an office partner for many years and he once decided to shop for prices on a dental procedure he needed. He asked his dentist for the billing codes for his recommended procedure and called three other dentists and asked them for prices for those codes. No dice of course, he would have to come in and get a complete evaluation to get a price. This is like shopping for TV's at stores that charge you a couple of hundred bucks at the door to come in and browse whether or not you buy anything. Some market.

If you are young and want to save money on dental care it's a fact that a couple of plates will cost you far less to maintain over your lifetime than your natural teeth. Anyone who hasn't opted for this cost saving procedure is not allowed to talk to me about market solutions. They are not thinking rationally about health care. They are emotionally attached to some expensive to maintain body parts.

arthroscopic meniscectomy no better than a placebo? you know how many of these things i scrub? ditto for lumbar discectomy which i heard the same thing about. the best thing government-controlled healthcare can do is bring these things to light and not pay for them. the only way to save money for the good of all is to ditch things that show little benefit or don't save enough (younger) people. President Obama was on the right track with the task force mammogram recommendations but then he acquiesced to the backlash.

A lot of people commenting here seem to believe a couple off odd things.

First, that somehow a government bureaucracy would operate more responsibly, efficiently and ethically than a private entity. There is no evidence of that anywhere in all of the world, in fact there are mountains of evidence of just the opposite, yet many of you seem to believe it.

Second, that somehow health care decisions should be taken out of the hands of doctors, patients, and families and put in the hands of the state. While this wouldn't mean "death panels" as some claim, it will mean that people are allowed to die because it's not worth the money to save them.

I don't trust the state nearly enough to give them that kind of power.

As for Shadowfax's blog post, he's broadly correct, patient's are not consumers, they are patients. Sure, he has a political slant and the data is massaged a little to support that slant, but his thesis is correct, health care, or at least most of it, the way we want to have it in America, is not controlled by market economics.

Only those patients that self insure, that are spending their own money, can be called consumers. I think I've met two of those in my twenty something year career in ER and EMS.

Fantastic post. I have a guestion for all the doctors, who write orders for screening mammograms. Why 90 years old women needs one? If the results become positive,is she going to go under chemo,or rad.therapy? What obout the patients,who are in the whilchairs,whith oxygen tanks,not being to able to even recognize,that they are in the mammography room. Do You know,why they come? Because the Dr. told them so.

I have to say that I completely agree with your premise, that patients are not consumers, and you make some excellent points. I don't believe that market economics can or should be used in theheatlh care arena. As a clinician, I don't know if I want my patients to be "consumers" and, in any case, my services come with the room charge, so that doesn't even make sense. As a patient, I don't want to be a consumer either. I want to be a patient. My question is what do we do with chronically ill patients who could make better health and lifestyle choices, but don't? These are the patients who come into the hospital repeatedly, spend weeks in the hospital, and are discharged to inadequate situations, only to return to the hospital a few weeks or months later. These are the patient who likely make up a good portion of the top healthcare spenders.

"Second, that somehow health care decisions should be taken out of the hands of doctors, patients, and families and put in the hands of the state. While this wouldn't mean "death panels" as some claim, it will mean that people are allowed to die because it's not worth the money to save them."

That's a frequently repeated "talking point". Did you intentionally leave the words "Insurance Companies" out of that first sentence? In your last paragraph you suggest that the majority of care is paid by insurance. They are part of the decision making process, and of course they have been known to decline claims.

My wife works at a local cancer care facility, if private insurance or medicaid / medicare refuses coverage the results are exactly the same. Patients don't feel any better dying under private insurance, and in fact they and their families worry a lot more about private insurance denying / delaying care.

And why would a state or federal enterprise be less ethical than a "for profit one" ?

God bless you Doctor. As a health care consultant for large employers, our data is an exact mirror of yours. Here's the other side--The Dem's vision of a Castro style health utopia is just as stupid as the right's CDHP warped vision. Here's my partner's cost-shifting editorial. http://tinyurl.com/3ultm6r

One question. Hasn't the medical industry been moving in the direction you seem to support (ie the patients bearing less out of pocket expenses as a percentage of medical costs). If so, why are health care costs out of control? There must be some other much larger force at work. So answering that question would seem to be a much better use of your time.

Of course there is an alternate explanation. Perhaps your rationalizations and anecdotal evidence notwithstanding you are wrong. Nah... you're a doctor and smart and stuff... couldn't be...

I disagree. For major medical intervention, you are undoubtedly right, but there is far too much unnecessary medical care being sought simply because the patient/consumer has nothing to lose by seeking it. When you blow a head gasket on your car, you do need a mechanic, but is it necessary to go to the garage when your tires are low?

I have pretty good health care coverage, but I nevertheless treat it like i have skin in the game, maybe because of a built in distrust of doctors. A few years back, I broke a couple of ribs in separate incidents. In my martial arts studio, one of my peers, a doctor, suggested I should get then x-rayed. My response was, "And then what?" They're broken. There's no treatment. And sure enough on schedule after 6 weeks and a day the pain went away. More recently I broke a toe at work - just the tip, nothing medically to be done. OSHA required me to seek treatment, but follow ons was optional, and I declined. Currently, I'm self-treating a case of Plantar Fasciitis, support tape, rest, elevation, stretching. All the things a doctor would charge my insurance a lot of money to tell me to do.

Why should a patient sit still for a $4000 MRI in a hospital, when he can go 5 miles down the road and get exactly the same scan done for $600 at Open Advanced MRI? But with health insurance paying for it, this alternative is never proposed.

On the flip side, I do know when to seek medical help. I didn't hesitate when I realized that red spot on my head was probably skin cancer, and it was, and now it's gone. Skin in the game, literally.

My point is that there's no sense in seeking a medical opinion that essentially amounts to "Gee, that must hurt!" and being sent home with an overpriced bottle of Ibuprofen. But if you make it free to the consumer, you will get unnecessarily expensive abuse.

True, but I don't see what that has to do with anything. Food, shelter and clothing aren't elective, either, but there's a market for them.

2. There is an asymmetry of information

I absolutely agree. The health care industry is riddled with obfuscation. Providers bill one amount but accept a smaller amount as payment in full. The cost of care is often split between the patient and an insurance company (possibly the government). And the cost of insurance is often split between employers and employees. The end result is that the consumer often has no idea what they're really paying for any of it. If that's not a recipe for runaway inflation, I don't know what is.

3. Purchasing power is concentrated in the hands of a very small number of "consumers"

Your data do not support this conclusion. Your data indicates that the vast majority of spending is concentrated on a very small number of patients. However, those patients do not necessarily wield the purchasing power. For the reason why, see above.

If we really want to know why the cost of health care is increasing so much, perhaps we should ask the government. After all, the government is, by far, the largest purchase of health care in the United States. Almost half of all health care in the United States is paid for by the government. Talk about lack of incentive to contain costs.

His main point (that market forces don't affect health care consumption) is clearly wrong, but he obfuscates it by not looking where this is obvious, i.e. the increased services demanded by those who don't pay for their health care (e.g. emergency rooms in poor areas vs. richer areas). He asserts that health care is cut and dry ("you get pneumonia", "your knees wear out", "you get a lump on your breast"), but it's not usually that obvious. For those things he does mention, catastrophic insurance would be ideal. Nor does he mention that there are a variety of potential remedies and they have different costs -- do you get the name-brand or the generic? Do you get the aluminum knee or the titanium-graphite one? Do you get the best surgeon on earth or do you get a good surgeon at your local hospital? These are all issues that are distorted upwards in price if there is no incentive to economize.

His point regarding asymmetry of information applies to all markets, including the successful ones. It is not specific to health care and therefore there is no reason to think that it would be a problem in that particular market when it isn't in others. Furthermore, he bemoans things like lack of price transparency when this is a result of the regulations, not the market.

His third point analyzes the distribution of medical services/costs IN THE CURRENT SYSTEM, with the sky-high prices currently in place due to market distortions, and assumes these would be the prices under a free market ("...I doubt it would make one iota of difference in the actual cost...). He furthermore assumes that medical care is a right and that inability to pay should be no impediment to receiving services. It isn't and it should.

I'd also like to add that regulation creates warped incentives that, in some medical sectors, is clearly worse for the consumer (in others they are also worse, but not so clearly). For example, diabetes treatment requires many visits to properly adjust the dosages of insulin/medicine, and are therefore most efficiently administered by nurses. But because insurance doesn't reimburse for nurse care but only for face-to-face ("butt in seat") doctor visits, it's often a year or more until diabetes patients are properly dosed.

"I'd also like to add that regulation creates warped incentives ...But because insurance doesn't reimburse for nurse care but only for face-to-face ("butt in seat") doctor visits, it's often a year or more until diabetes patients are properly dosed."

That isn't an example of that is an example of private industry rules.

The very first time I needed medical care as an adult, I spent two days in the hospital, not because I needed to be hospitalized, but because the doctor knew my insurance would pay for tests she wanted to do only if I were in the hospital. That was in 1974, and things haven't improved. I still want to believe she did it because I wouldn't have gotten treatment otherwise - but she wouldn't have gotten paid, either, since I could barely afford food at the time, and wouldn't have paid for tests or treatment - it was mono, for which there still isn't any treatment other than relieving symptoms.

Insurance rules distort many treatment decisions. I see no difference in the government or insurance companies making those rules, except, of course, the government has no profit to maximize. So it is in the government's interest to manage the rules to maximize health to lower, but not necessarily the insurance companies'.

The key to me is a reiteration your first point:medical problems are essentially coercive-- when you get sick, you can choose not to have care, but greatly increase your chance of death. Therefore, "free" markey principles do not apply.

NO mention in original post of the abuse of the 911 system and it's astronomical end-cost(ER visits for what should be clinic/Dr. office appts.etc.), but of course we are only looking at one side of this question-I mean, God forbid we actually take some personal responsiblity, right? Let's not start holding the people who contribute nothing to pay for their healthcare accountable for their abuse and the resulting costs of it.

Shadowfax

About me: I am an ER physician and administrator living in the Pacific Northwest. I live with my wife and four kids. Various other interests include Shorin-ryu karate, general aviation, Irish music, Apple computers, and progressive politics. My kids do their best to ensure that I have little time to pursue these hobbies.

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